The rent-a-room scheme allows people to earn rental income tax-free when they let out a furnished room in their own home. You do not have to own the property – rooms sub-let in rented properties also count (but check that sub-letting is allowed under the terms of the tenancy agreement). You can also benefit from the scheme if you run a bed-and-breakfast or guest house.
Automatic Exemption for Rental Income Of £7,500 Or Less
If the rental income that you receive from letting a furnished room in your own home is £7,500 a year or less, the exemption applies automatically. You do not need to tell HMRC about the income or complete a tax return.
If more than one person receives the rental income, the limit is halved to £3,750 per person. This limit applies regardless of the number of people receiving the income, even if the total comes to more than £7,500.
Sisters Abigail, Anna and Anita live in a property that they own together. They let out two furnished rooms, receiving rental income for the tax year of £9,000. Each sister receives £3,000, which is less than their individual rent-a-room limit of £3,750. All the rental income is tax-free and does not need to be returned to HMRC. It does not matter that the total is more than £7,500, as each person’s share is within their individual limit.
Rental Income of More Than £7,500
If the rental income is more than £7,500 (or more than £3,750 per person where more than one person receives the income), you can still benefit from the scheme. However, you will need to complete a tax return and choose to opt in. If you do this, you simply pay tax on the excess over your rent-a-room limit.
Benny lets three furnished rooms in his home receiving rental income of £9,000 for the tax year. He opts into the rent-a-room scheme and is taxed on a rental profit of £1,500 – the amount by which his rental income exceeds his rent-a-room limit of £7,500.
Using the rent-a-room scheme is beneficial if the limit is more than your expenses as it will reduce your taxable profit.
You cannot create a loss by deducting the rent-a-room limit rather than actual expenses. If your rental income is less than the limit, the relief applies automatically and there is no tax to pay or anything to report.
If your rental income is below £7,500/£3,750 as relevant and less than your expenses, it is not worthwhile using the scheme.
If you make a loss, it is better to opt-out of the scheme and preserve the loss, which you can then carry forward and set against any future profits. To do this, you will need to complete a tax return and opt-out of the scheme.
Partner note: ITTOIA 2005, Pt. 7, Ch. 1 (ss 784—802).